June 18 – Grain Markets in Unprecedented Territory

Good Morning!

Grain markets this morning are mixed as the complex continues to digest the flurry of trade and political activity that we saw last week.

“I’m particularly interested in black swan events: unprecedented surprises that destroy the conventional wisdom about how the world works.” – Paolo Bacigalupi (American Author)

graincents-trial

Grain Markets in Unprecedented Territory

Grain markets this morning are mixed as the complex continues to digest the flurry of trade and political activity that we saw last week.

The interesting thing to note is that soybean prices dropped to a one-year low on Friday, but are now flat this morning. This is after China is going to slap 25% import tariffs on American soybeans. Has the trade war already been priced in for American soybean prices?

Also on the trade front is the immediate ban of Canadian wheat purchases by Japan after it was announced that some GM varieties were found in an Alberta ditch. This is an interesting development for the 6-million-tonne market that is Japanese wheat imports.

That’s because Canada was on the verge of picking up market share in Japan thanks to the TPP. With the United States not engaged in the trade deal, the ~50% market share held by the U.S. in the Japanese market is up for grabs. Canada looked poised to benefit, but now it appears that Australia will generate sales to the market. It’s entirely possible that the United States could move to rejoin the TPP.  With this opening, the talk from the Trump administration in recent weeks might turn to action.

On the weather front, most of Eastern Canada, the American Midwest, and specifically, the Eastern Cornbelt got smoked with some sweltering heat this weekend. [1] I spent yesterday in Sarnia, Ontario on Lake Huron where the temperature hit 43 degrees Celsius with the humidity (or 110 Fahrenheit). There is some rain on the horizon this week for most growing regions across North America. [2]

Funds Losing Risk Appetite

With more risk seemingly on the table, the Commitment of Traders report indicated on Friday, that managed money continued to slash their net long position on corn by 77,383 contracts, down 68% week-over-week. Hedge funds now hold a long position of 36,216 contracts. That’s a ridiculously far cry from the long position of 202,427 contracts that managed money had just three weeks ago.

grain-markets-corn-prices

For soybeans, managed money continued to slash their net long position on soybeans by 59,428 contracts or down 82% week-over-week to 12,870 contracts (net-long). This is now just 10% of the long position that hedge funds held three weeks ago!

grain-markets-soybean-prices

Who Wins in a Trade War?

Last week was easily one of the most intense ones for volatility that I’ve experienced in the last decade of actively participating in commodity markets.

First, we had the June WASDE report that showed some relatively bullish factors for corn and soybeans. However, the market traded the geopolitical risk.

Then, we got specific data points on crop production expectations in places like Australia, Europe, and Russia, which were mostly also bullish. But again, the market traded the geopolitical risk to lower levels.

Finally, we saw some serious geopolitical action on Friday as the Trump administration proceeded with 25% tariffs on about $50 billion in Chinese goods. Through the countries called off a “trade war” roughly two weeks ago, progress in negotiations has been extremely slow. The US President is also trying to send a message about his administration’s dissatisfaction with China’s stance on intellectual property theft.

China responded by slapping $34 Billion worth on tariffs on 545 different U.S. products. Those products include soybeans, electric cars, orange juice, whiskey, salmon, and cigars, according to China’s Ministry of Finance. In Iowa alone, it’s been estimated that this could cost farmers $624 million. [3]

One thing we have to remember in all of this is that these tariffs are not yet in place. They are supposed to get enacted in early July, which means that there is still a few weeks for Beijing and Washington to come to some compromise.

Once you’re in a trade war though, history tells us that it’s very hard to get out if it and end things. [4] Grain giant Cargill says that a trade war between the world’s two largest economies “will lead to serious consequences for economic growth and job creation.” [5]

The interesting thing happening right now in the soybeans market is that China might have to pay more for soybeans as this trade spat continues. Rabobank hinted this week that Chinese buyers would likely face premiums on soybeans of South American origin. Currently, Brazilian soybean port prices are about 40 cents USD/bushel more expensive than American port prices. We saw the same dynamic transpire a few months ago after China initially threatened tariffs on American beans.

Prices in South America have already been pushing higher thanks to the ongoing drought in Argentina, recent supply chain stoppages in Brazil, and the flurry of Chinese buying aimed at getting out ahead of any change in the nation’s policy.

Where Do Grain Markets Go Next?

Ultimately, we’re in unprecedented territory for grain markets as there has never been a trade issue as large as the one we’re seeing between the US and China right now. Not Syngetna Vipettra corn. Not Triffid flax. Not canola blackleg. Not even GMO wheat issues (which usually goes away within a week or two, as mentioned).

For our GrainCents readers, we continue to help manage risk and understand the different factors that are creating this storm in grain markets. Given all the risk on the table last week, yesterday’s Weekly Digest was especially important to read.

To growth,

Brennan Turner

President | CEO
FarmLead
TF: 1-855-332-7653
contact@FarmLead.com
@FarmLead or @GrainCents on Twitter

P.S. I’ll be in Regina at the Canadian Farm Progress Show in the afternoon of Tuesday, June 19th. Email, text, or hit me up on Twitter at @BrennanDTurner if you’d like to connect!

 

At 7:15 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3178 
CAD, $1 CAD = $0.7588 USD)

Sept Corn: -3.3¢ (-0.90%) to $3.580 USD or $4.718 CAD
Aug Soybeans: -2.0¢ (-0.22%) to $9.10 USD or $11.992 CAD
Aug Soybean Meal (per short ton): -$0.80 (-0.02%) to $340.20 USD or $448.32 CAD
Aug Soybean Oil (cents per lbs): -0.50¢ (-0.17%) at 29.57¢ USD or 38.97¢ CAD  
Sept Oats: -2.8¢ (-1.20%) to $2.308 USD or $3.041 CAD
Sept Wheat (Chicago): -6.5¢ (-1.27%) to $5.070 USD or $6.681 CADS
Sept Wheat (Kansas City): -6.8¢ (-1.27%) to $5.270 USD or $6.945 CAD

Sept Wheat (Minneapolis): -0.8¢ (-0.14%) to $5.80 USD or $7.643 CAD
Nov Canola: $0.40 (0.08%) to $11.564/bu / $509.90/MT CAD or $8.775/bu / $386.93/MT USD

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.

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